FRANKFURT, Germany (AP) — Soaring oil prices from the Iran war pushed inflation higher in Europe in April as growth continued to underperform in a worrying combination both for consumers and policymakers at the European Central Bank.
Annual inflation in the 21 countries that use the shared euro currency rose to 3.0% from 2.6% in March, fueled by a 10.9% increase in energy prices, the European Union statistical agency Eurostat reported Thursday. Crude oil is trading above $120 per barrel, up from around $73 before the outbreak of the war on Feb. 28.
Meanwhile euro-area growth for the first three months of the year disappointed with a marginal increase of 0.1% over the quarter before.
The war is dealing a massive shock to the global economy because Iran has blocked the Strait of Hormuz, the waterway through which some 20% of the world’s oil formerly passed on its way to customers from producers in the Persian Gulf. The surge in oil prices has been quickly reflected at gas stations and in the price of jet fuel.
The combination of slow growth and high inflation, or “stagflation,” threatens to become a headache for the European Central Bank, whose policymakers are expected to leave its benchmark interest rate unchanged Thursday, even though inflation is now clearly above the bank’s target of 2%
The expected surge in inflation is especially troubling because it comes at a time of sluggish economic growth. The usual antidote to inflation is for the central bank to raise its benchmark interest rate, but that can slow growth by raising credit costs for buying things. If inflation is expected to be temporary, the typical decision is to look past it because interest rate changes take months to have an effect on the economy.
On the other hand, if the central bank waits until inflation is built into the economy through higher prices for food, manufactured goods and through higher wage demands, it’s even harder to wring higher prices out of the economy with painful rate hikes.
The Bank of Japan and the U.S. Federal Reserve both left rates unchanged at meetings this week, and the Bank of England was also expected to also hold steady Thursday.
So the ECB and other central banks are currently frozen in place, warily watching the inflation wave roll through the economy and holding off on both rate rises and rate cuts. The bank’s benchmark rate has been unchanged at 2% since June 2025.
FILE -Clouds cover the sky over the headquarters of the European Central Bank in Frankfurt, Germany, Sept. 11, 2025. (AP Photo/Michael Probst, File)
LONDON (AP) — The Bank of England is expected to keep interest rates on hold later Thursday as policymakers assess the economic impact of the Iran war and Tehran's effective closure of the Strait of Hormuz, through which a fifth of the world’s crude passes in peacetime.
Economists said the nine-member panel may hint that interest rates could increase in the months to come if the conflict in the Middle East — where a shaky ceasefire is for now holding — puts more upward pressure on U.K. inflation.
For now, the Monetary Policy Committee is expected to keep the bank's main rate at 3.75%, with one or two members possibly voting for a quarter-point hike as a preemptive measure against higher inflation. On Wednesday, the U.S. Federal Reserve left interest rates unchanged for the third meeting in a row as it warned of developments in the Middle East “contributing to a high level of uncertainty about the economic outlook.”
Before the war, there had been an expectation in financial markets that the bank would cut rates given that inflation was predicted to fall back toward its 2% target during the spring. The war has since upended the bank’s predictions and wider global economic forecasts as oil and prices have spiked sharply higher.
Sandra Horsfield, an economist at Investec, said the “repercussions of the conflict are still keenly felt and uncertainty about how the situation could evolve also remains high.”
Energy prices have raced up again over the past few days as traders price in a growing expectation that the Strait of Hormuz will remain closed for a long time to come. Brent crude, the international standard, briefly jumped to over $126 a barrel earlier Thursday, its highest level since the aftermath of Russia's full-blown invasion of Ukraine four years ago.
Likely more important than the decision, will be the bank's quarterly economic projections published at the same time and the subsequent news conference, led by Bank Gov. Andrew Bailey.
The forecasts will be the first since the United States and Israel launched the strikes on Iran that started the war on Feb. 28 — in general, inflation forecasts are likely to be raised and growth predictions lowered.
Last week, official figures showed inflation in the United Kingdom climbed in March after a sharp jump in prices at the pump in the wake of the disruption to energy supplies caused by the war. The annual consumer price inflation rate increased to a three-month high of 3.3%, from 3% the previous month.
Bank of England policymakers will be keeping an eye on whether the evident inflation spike starts to spread through the economy, by way of higher wages, for example. They will also be alert to any upcoming action from Britain's Labour government to limit the inflation impact on households and businesses. Treasury chief Rachel Reeves, whose hopes over the cost-of-living have been blown off course by the crisis in the Middle East, has said she is ready to provide support when and if needed.
FILE - Prices are shown on a board at a gas station in London, England, Monday, March 30, 2026. (AP Photo/Kin Cheung, File)
Britain's Chancellor of the Exchequer Rachel Reeves leaves 11 Downing Street to attend the weekly session of Prime Minister's Questions in parliament in London, Wednesday, April 29, 2026. (AP Photo/Kirsty Wigglesworth)
